JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share.

JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred stock is 10 percent, and the yield of the debt is 6.25%. If JLP’s tax rate is 34 percent, what is the WACC?

After tax cost of debt = 6.25 (1-0.34) = 4.125%
Source Amount % of Total Cost Weighted Cost
Common Equity 130 0.8 14% 11.2
Preferred 10 0.062 10% 0.62
Debt 22.5 0.138 4.13% 0.57
Total 162.5 12.39%
Answer is A. 12.39%

0.0625 × (1 − 0.34)[(25,000 × 900)/[25,000 × 900 + 10,000,000 + 6,500,000 × 20]] + 0.14 × [(6,500,000 × 20)/[25,000 × 900 + 10,000,000 + 6,500,000 × 20]] + 0.1 × [[10,000,000]/[25,000 × 900 + 10,000,000 + 6,500,000 × 20]] = 12.39%.

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